Will the real ‘Santa Claus Rally’ stand up?

CHAPEL HILL, N.C. (MarketWatch) — Wall Street is taking the good name of Santa Claus in vain.

Yes, I know: You’ll be shocked that Wall Street could be so cynical.

But how else can you explain the shameless way in which Santa’s name is exploited to justify whatever positive forecast advisers might otherwise have during the holiday season?

Consider the range of meanings that I have found advisers give to the “Santa Claus Rally:”

At some point during the month of December, the stock market will rally

The entire month of December tends to be a good one for the stock market

The stock market performs particularly well starting around Christmas and lasting until the first days of the New Year

Do any of these definitions stand up to statistical scrutiny?

Let me deal with each in turn, based on the performance of the Dow Jones Industrial Average back to 1896, when it was created.

The first definition — that the stock market will rally at some point during December — is true but pointless, since the stock market rallies during every period of the year. There has never been any month in which the stock market didn’t at some point stage a rally.

Consider next the second definition that some give to a so-called Santa Claus Rally: That December as a whole is a particularly strong month for the stock market. At first blush, the evidence for this proposition would appear to be strong, since December’s average return since 1896 has been higher than the average across all other months.

But it turns out that there is less here than meets the eye. First, December is only inconsistently near the top of the monthly return rankings. In recent decades, for example, December has been one of the best. But in other periods, especially during the first half of the last century, December’s rank was closer to the middle of the pack.

Consider the conclusion drawn by Josef Lakonishok, a finance professor at the University of Illinois at Urbana-Champaign, and Seymour Smidt, a finance professor at Cornell. Upon analyzing the monthly data for a study they performed two decades ago, they concluded: “Months that performed well in one subperiod are not, in general, months that performed well in other subperiods. Therefore, it seems that there is no consistent monthly pattern in the stock market.”

Bracketing for the moment December’s inconsistency from one subperiod to the next, however, it’s also worth noting that it’s not been the best month of the calendar for the Dow. That distinction belongs to July, believe it or not. Yet I don’t ever recall hearing Wall Street in midsummer trumpeting “Christmas in July.” Why not?

What about the third definition of the Santa Claus Rally, the one that refers to strength between Christmas and early January? It turns out that this one does have strong historical support. In fact, it corresponds to two seasonal patterns that have been well documented in other contexts: The so-called “turn of the month” and “turn of the year” effects.

Since 1896, for example, the Dow between Christmas and New Years has risen 78% of the time, producing an average gain of 1.06%. That compares to an average gain of just 0.10% across all other 4-trading-day periods since 1896, over which the Dow rose just 55% of the time.

Notice carefully, however, what all of this means: The Santa Claus Rally that really exists does not arrive until Christmas is upon us.

Will the real ‘Santa Claus Rally’ stand up?

CHAPEL HILL, N.C. (MarketWatch) — Wall Street is taking the good name of Santa Claus in vain.

Yes, I know: You’ll be shocked that Wall Street could be so cynical.

But how else can you explain the shameless way in which Santa’s name is exploited to justify whatever positive forecast advisers might otherwise have during the holiday season?

Consider the range of meanings that I have found advisers give to the “Santa Claus Rally:”

At some point during the month of December, the stock market will rally

The entire month of December tends to be a good one for the stock market

The stock market performs particularly well starting around Christmas and lasting until the first days of the New Year

Do any of these definitions stand up to statistical scrutiny?

Let me deal with each in turn, based on the performance of the Dow Jones Industrial Average back to 1896, when it was created.

The first definition — that the stock market will rally at some point during December — is true but pointless, since the stock market rallies during every period of the year. There has never been any month in which the stock market didn’t at some point stage a rally.

Consider next the second definition that some give to a so-called Santa Claus Rally: That December as a whole is a particularly strong month for the stock market. At first blush, the evidence for this proposition would appear to be strong, since December’s average return since 1896 has been higher than the average across all other months.

But it turns out that there is less here than meets the eye. First, December is only inconsistently near the top of the monthly return rankings. In recent decades, for example, December has been one of the best. But in other periods, especially during the first half of the last century, December’s rank was closer to the middle of the pack.

Consider the conclusion drawn by Josef Lakonishok, a finance professor at the University of Illinois at Urbana-Champaign, and Seymour Smidt, a finance professor at Cornell. Upon analyzing the monthly data for a study they performed two decades ago, they concluded: “Months that performed well in one subperiod are not, in general, months that performed well in other subperiods. Therefore, it seems that there is no consistent monthly pattern in the stock market.”

Bracketing for the moment December’s inconsistency from one subperiod to the next, however, it’s also worth noting that it’s not been the best month of the calendar for the Dow. That distinction belongs to July, believe it or not. Yet I don’t ever recall hearing Wall Street in midsummer trumpeting “Christmas in July.” Why not?

What about the third definition of the Santa Claus Rally, the one that refers to strength between Christmas and early January? It turns out that this one does have strong historical support. In fact, it corresponds to two seasonal patterns that have been well documented in other contexts: The so-called “turn of the month” and “turn of the year” effects.

Since 1896, for example, the Dow between Christmas and New Years has risen 78% of the time, producing an average gain of 1.06%. That compares to an average gain of just 0.10% across all other 4-trading-day periods since 1896, over which the Dow rose just 55% of the time.

Notice carefully, however, what all of this means: The Santa Claus Rally that really exists does not arrive until Christmas is upon us.